Corporate insiders have recently shown a significant increase in bearish sentiment, marking a departure from previous years. According to Nejat Seyhun, a renowned finance professor at the University of Michigan, the percentage of companies experiencing net insider buying dropped to 12% as of July 21, significantly lower than any other month in the past decade. On average, the net insider-buying percentage since 2013 has been 27%.
Exclusive Focus on Corporate Officers and Directors
In his calculations, Seyhun considers transactions made exclusively by corporate officers and directors. This is a crucial detail, as the definition of “insider” according to the Securities and Exchange Commission expands to include investors who own 10% or more of a company’s shares. Seyhun argues that these larger shareholders lack the special insight into their companies’ prospects that corporate insiders possess, which is why their involvement is excluded from the analysis.
Implications for the Stock Market
Seyhun believes that the plummeting insider-buying ratio suggests a bearish outlook for the stock market in the coming months. This signal is further reinforced by the trend of decreasing ratios observed over the preceding months. Notably, the lowest monthly insider-buying ratios recorded over the past decade were in April and October 2021. These occurrences preceded a bear market that began in January 2022.
Insiders’ Sentiment Reflects Market Trends
However, the current behavior of insiders indicates that they believe the market’s upside potential has now been largely exhausted. With the S&P 500 currently sitting about 10% higher than it was in February, insiders are showing signs of caution.
Dr. Nejat Seyhun, an expert in insider trading, has enough confidence in the signals provided by corporate officers and directors that he, along with his son Jon, created a subscription website called InsiderSentiment.com. This website allows users to inspect insider transaction data collected by the SEC. Importantly, no compensation is received by either Dr. Seyhun or the website from this venture.
Despite this overall pessimistic sentiment among insiders, there are certain market sectors that are still viewed positively. According to Dr. Seyhun, insider sentiment remains optimistic in the communications, consumer staples, financials, real estate, and utilities sectors. Notably absent from this list is the energy sector, which was once a favored choice among insiders but has since fallen out of favor.
Here is a summary of the two stocks within each of these positive sectors that have seen the most net insider buying over the past month, as of July 21:
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Communications:
- Stock 1
- Stock 2
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Consumer Staples:
- Stock 1
- Stock 2
-
Financials:
- Stock 1
- Stock 2
-
Real Estate:
- Stock 1
- Stock 2
-
Utilities:
- Stock 1
- Stock 2
By Mark Hulbert
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